De-politicize railways, create independent corporation

Railway fares have finally been raised for the first time in 10 years. Even so, the change may reduce just Rs 6,600 crore of the loss of Rs 25,000 crore on passenger traffic.

Why do governments subsidise rail fares so much and for so long? Of all subsidies, rail subsidies look the least justified. They are not used mainly by the poor, and are in no sense essential. They run mostly in developed areas, and so do not serve truly backward regions. The railways represent 19th century technology that was overtaken by buses in the 20th century, and buses everywhere are far cheaper than trains. So, why subsidise a costly, obsolete mode of travel that has no bearing on poverty or backwardness?

For long-distance journeys like Delhi-Chennai, bus travel may be too inconvenient. But such long-distance journeys are for purposes like business, employment, meeting relatives, pilgrimages and tourism. These do not merit subsidies in a poor country.

Suburban commuting fares are the most subsidized of all. Some analysts argue that this helps poor people come into cities. In fact the overwhelming majority of commuting passengers are travelling for commercial reasons. Casual workers rarely commute by rail.

Commercial commuters adjust the cost of commuting into their sale prices.

Experience shows that if you raise suburban fares, employers will typically raise the conveyance allowance of employees. Corollary: the suburban rail subsidy benefits the employer, not the employee.

The truly poor do not typically commute to work. They set up shanties, illegally, not far from their places of work (an excellent account of this in Kolkata was given in an EPW article by Vijay Jagannathan). In Delhi, 80 per cent of colonies came up this way and were later regularized. Anyway, poverty is extremely low in big cities with suburban trains, so this is hardly a focus area for subsidies.

Besides, cities are getting more and more congested and polluted. A suburban rail subsidy is a subsidy for congestion and pollution. Air pollution is a major cause of disease and death. In Mumbai, 4,000 people are killed annually by falling off overcrowded trains or being run over. Sad to say, the suburban subsidy encourages even more over-crowding and deaths.

For a decade, the Railways have increased freight rates but not passenger fares. The ratio of fares to freight rates is the highest in the world. So, an implicit tax is being imposed on all goods including exports, just to subsidise passenger fares. This implicit tax on freight raises prices for everybody, and makes exports uncompetitive.

The British Raj instituted a separate railway budget because the railways at the time accounted for a huge chunk of government revenue. But today rail revenue is modest, less than that of an oil company like Indian Oil Corporation.

In our coalition era, the Railway Ministry has become an important patronage post awarded to influential coalition partners. The Railway Minister presents an annual Railway budget to Parliament with almost as much fanfare as the Finance Minister presents the overall budget, a privilege not extended to the railways anywhere else in the world.

The Railways are cynically seen as an avenue for giving jobs and contracts, a huge patronage machine. Railway Ministers constantly sanction new, low-priority railway trains for their favoured constituencies, or create new regional headquarters to justify additional jobs in a grossly overstaffed organization.

How do we end this waste of public money on patronage and unwarranted subsidies? Total escape is politically impossible, but converting the Railways from a government department into a corporation can curb the damage. This has already been done in telecom.

8 thoughts on “De-politicize railways, create independent corporation”

  1. everybody knows…that rail fares are artificially low in india and need rationalisation to some extent. But wow…”Casual workers rarely commute by rail.” the only way a casual suburban worker can afford to come to the city is train…i can vouch for that in kolkata from personal experience. And ” if you raise suburban fares, employers will typically raise the conveyance allowance of employees.”. In today’s age of consolidated salary and contractual staffs… Who the hell has ever heard of convenience allowance apart from the sarkari babus and corporate honchos. Mr. Aiyar is either leaving in a fool’s ivory tower…or is speaking simple false hood. That too ironically to justify something(rail fare hike) which most people are hardly against. I had been a daily rail commuter for long, and personally know dozens of others representing myriad social strata. So, i could easily recognise the rubbish in this article. I just feel scared thinking about other ‘swaminomics’ articles which was about economic issues i had little personal wisdom about. I should not have taken them at face value. This edition’s particular article have put a big dent in reliability of this column to me.

  2. buses are cheaper than trains ?? I don’t get it.
    from point A to B…trains are pretty cheap option than a bus.

  3. Soumyajyoti BAidya

    Railway fare needs to be increased and the quality of service provided by the Railways should be improved . Not only railways, even the Metro Railways in Kolkata needs a serious price hike. Minimum fare is still Rs. 4 where you can travel approx. 4.7Kms in a AC METRO TRAIN within 10 minutes . In a bus the same distance would take around 30 minutes.
    But I would disagree to the statement “In fact the overwhelming majority of commuting passengers are travelling for commercial reasons. Casual workers rarely commute by rail.”
    As i tavel regularly by local SUBURBAN tains (SEALDAH division) I have a good knowledge of kind of people travelling in the trains . You can find poor people like regular labourers come to city for earning everyday.
    But then I do complety agree with the rest of the article.

  4. Very true Sir
    I think the main problem is that Indian politicians work only for two year and the remaining three years are just for gaining vote bank and planning for the next elections, so we do not get any concrete steps for strenghthening of the country.
    The only growth model that works for them is strenghthening of their votebanks.

  5. Sir,
    I am a great admirer of you and read all ur articles whenever published. But this one i feel is very skewed and based on wrong assumptions:
    1. Trains are used by middle class, lower middle class and poor. Travel in any long distance or short distance train and you will come to know. Rich fly, even for short distances like bangalore-chennai. Further there are lot of workers n job seekers who travel from far places to bigger town and cities.
    2. In no way bus is cheaper than train. Please check the fare of corresponding classes for the same distance and you will be see that train is much cheaper mode.
    3. People on business travel usually travel by flight and in case they choose train, they opt for AC class…But AC classes constitute hardly 5-10% of the total traffic.
    4. In India poor do move to far off places in search of employment.

    Please travel once by sleeper class or II class in Indian railway, then you will realize how incorrect yo were.

    Indian railways in true sense the lifeline of India. There are many lives dependent of this.

    In my opinion rail subsidies are justified. At the same time I agree that there are lot of inefficiencies in the current system. Focus should be to make them more efficient.

    I guess 4 years back i read ur article on why petroleum product should be subsidized. U cited that ultimately our money goes to gulf but I strongly believe that the money spent on subsidizing rail fare is ultimately helping in building an economically strong nation and bringing people closer.

  6. i think u should bring lalu g back he is the only one to produce a turn over of 700000000, n took railways in a better postion ever…

  7. Sir,

    I have followed your insightful articles on India for years. Thank you for that!

    Well, I had a question, which is if Railways is a profitable PSU.


  8. Sir,
    1. I do not agree with the author. Better solution is full scale privatization with brainstorming on how to avoid monopoly and create competition in Railways operations by private players. That looks difficult but should not be impossible.
    2. PSUs are highly inefficient often worse than departmental undertakings. Most PSUs run on government largesse. Corporates are preferred model for Ministerial bureaucracy as PSUs very easily oblige them compared to departmental undertakings.
    3. If proper study on PSUs are conducted, it will reveal their huge inefficiency and corruption.
    4. Most PSUs inefficient operations are being funded by government against its own policies and against CVC guidelines which do not permit any preference to PSUs over private players.
    5. Efficiency of corporations is a myth.

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